Compliance, NALI/NALE, SMSF

NALE penalty appropriate, but needs clarity

NALE penalty level

The update to the NALE penalty in the 2023 federal budget is a reasonable approach, however, further clarification is needed on what defines a NALE compliance breach.

The changes to the non-arm’s-length expenditure (NALE) penalty in the 2023 federal budget are appropriate, but there is still a need for clearer guidelines on defining NALE expenses under the new rules, according to an SMSF technical specialist.

SuperConcepts SMSF technical support executive manager Nicholas Ali said the NALE penalty proposed in the budget is a more reasonable approach to addressing the issue than that first proposed earlier this year.

“The original announcement was that the penalty rate on NALE will invoke a non-arm’s-length income penalty of five times the original cost breach for the SMSF, which equates to a total of 225 per cent tax rate on NALE breaches,” Ali told attendees at a SuperConcepts SMSF strategies webinar today.

“Now the budget has proposed a two times penalty rate on that general expense as the NALE taxing cost. That’s probably where it should be when you look at how it impacts somebody that did pay the non-arm’s-length expense versus somebody that didn’t pay it, but is now paying NALE at the two times expense rate. They work out to be about the same.

“We thought that 225 per cent was too high. Now we’re probably at the right spot with regards to how the penalty regime works.”

He added that while the reduced NALE penalty was welcome, more clarification was needed on the definition of what might be considered a NALE breach.

“We do have issues with regards to the definition of what is potentially going to be a NALE expense issue. What is going to be taxed at that two times rate, this is what’s contentious,” he noted.

“With regards to the action penalty, it’s still vague and ambiguous as to what is going to incur [the penalty] in the first place. We’d like to see some sort of tightening up there. Perhaps there will be an announcement from the ATO that clarifies [this] expenditure.

“We’re stuck with this regime of guessing what is the real market rate for an expense. I don’t like the way it is, but we have no more clarification at this stage, so we are stuck with Practical Compliance Guideline (PCG) 2020/5.”

The ATO earlier this year said it has no intention of making adjustments to PCG 2020/5.

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